Sumantra Sen emphasises the role of extra-financial
communication and its strategic importance in an organisation

India?s Financial Markets ? distinguished
member of the global
trillion-dollar club and one of the
top 15 in terms of capitalisation
? have played a significant part
in the country?s overall growth story.
A ten-fold increase in the annual FDI
flows from USD 2.2 billion in 2004 to
about USD 27.3 billion in 2012 further
demonstrates the investors? interest
in recent times. Questions have been
raised about the continuity of these
trends especially in view of the present
slow-down, but the broad consensus is
that India is likely to retain its position
as one of the leading destinations for
investment.

There is, however, a word of caution.
The domestic business community
needs to be aware of the fact that,
more than ever before, they are being
tracked on much broader, extra financial
parameters. Subsequent to the
advent and extended consequences
of the global financial crisis, the practice of integrating ?extra financial?
information has been gaining attention
amongst the expanding tribe of
responsible investment community.
The growing unanimity amongst the
business and political intellectuals has
further emboldened this drive to seek comprehensive disclosure on issues
that are considered extra to financial
concerns. Although not really new as
a topic for debate, the last seven to
eight years have seen the discussions
around the role corporations play in
the society and their engagement with
other stakeholders shift to a new paradigm.
In the world of global business
as well as society in general, corporate
sustainability and responsible strategies
have emerged in recent years as
prominent issues. This change clearly
mirrors the shifting attitudes in meeting
the expectations that society places
upon the corporates.

The domestic
business
community needs
to be aware of the
fact that, more than
ever before, they
are being tracked
on much broader,
extra financial
parameters.

This set of concerns, that has conventionally
been brought up only
by the socially responsible investors
are evidently getting mainstream
with global investors, regulators and
analysts. Close attention to these
extra-financial factors is being paid as
they are viewed as material to a company?s
performance. These issues that
can have an effect on even reputable
operations and prominent brands,
have built a compelling business case
for the investors to train focus on the
extra financial issues in their holistic
approach to risk management. International
guidelines and recommended standards such as UN-backed Principles
of Responsible Investment and
Equator Principles lay the fundamentals
of this responsible approach and
are advancing in terms of adoption.
Global investment community may
not seek complete integration from
India at this stage but may well be
looking at some adherence to global
standards in managing these issues.
This is time for the corporates to set the
course for sustainable growth, address
the gaps in strategy and execution to
further contribute to the making of an
economic powerhouse.

In the financial
world that
transforms by the
second, strategic
communication
practices need to
stay a step ahead on
diverse existing and
upcoming issues
that organisations
may cope with,
predominantly
those that relate
to their fiduciary
duties and may
have organisational
impact.

Role of Strategic Financial
Communications

In the financial world that transforms
by the second, strategic communication
practices need to stay a step
ahead on diverse existing and upcoming
issues that organisations may cope
with, predominantly those that relate
to their fiduciary duties and may have
organisational impact. It must be able
to strategically evaluate the various
patterns of stock performance that the
company may undergo as a result of a
public disclosure or new regulations.

It is critical that all such material
and credible information about the
company is strategically disclosed to
the broader investor and stakeholder
community. The companies with
successful disclosure practices understand
that for their market capitalisation
to reflect the longer-term value they aim at creating, they need to
recognise the most useful actors and
build effective communication channels
with them. Corporate leaders and
communication need to understand
that any breakdown in the transfer of
critical information may reflect on the
quality of management and can give
away signs of ambiguity.

Due to the potential impact of legal liability claims emerging out of the
extra financial issues and the resultant
impact on the company?s share price,
financial communication has a pivotal
role in managing them. The decision
making by the investors as well as the
analyst community is a customised
and highly complex process. The motivations
and perspectives of different
participants in this decision making
space may vary significantly. The asset
owners and managers may differ
in their priorities particularly with
regard to extra-financial disclosure
as compared to the analysts who are
providers of research and independent
analysis. The financial communication
practice needs to be aware of
these differences and build expertise
in creating bespoke strategic communications
around extra financials.
The imperative point here is that mere
communication of extra financials and
their linkage with long-term value
even for more prominent firms may
just not be adequate. It is elemental
for the winning firms to identify and
engage with analysts that follow the
company and inform them suitably.
As the relationship between sustainability
and investment performance
plays out better in the long term, it has
been observed that analysts, who have
spent more years tracking a company
or sector and have also gained broader
awareness around the extra financial
issues, are expected to see the value
creation in the long run. As capital
markets are more responsive to recommendations
of more experienced analysts,
the company?s capital markets
communication efforts of integrating
extra-financials may be mainstreamed
while briefing them.

Communicating Corporate
Performance across Dimensions

In order to advance the dialogue
on extra financial communication,
companies need to shape up the kind
of information that they would like
to convey to the capital markets to
ensure that they are adequately assessed
as value generating elements
in the process of the long-term evaluation.
Therefore, the companies must
comprehend the environmental,
social and governance issues that are important to their business. Progressing
and sincerely understanding the
cause-and-effect linkages between
extra financial issues and the financial
metrics, is an essential stage of the process.
As it is a new area, the disclosure
and communication from companies
to the stakeholders including investment
community currently lack
well-defined links between ESG and
financial performance, and overall,
how they link up to corporate strategy.

Further, the disclosures must
include not only the data on past performance
but also the forward-looking
assessments. These assessments can
include forecasts that clearly articulate
how ESG factors are projected to affect
cash flows over a period of time.
Effectual Integration of this material
information into financial and corporate
performance will facilitate a
better measurement of the companies?
long-term capabilities. Who should
deliver this critical information is also
very relevant. Although the role of the
IROs is increasingly acknowledged,
many investors and analysts have
indicated that direct engagement with
the CEO or CFO is likely to influence
their investment decisions or company
analysis. Consequently, the straight
guidance from the Top or Board level
representatives, coupled with access to
reliable reporting channels and reports
should be helpful in mainstreaming
extra financials as well.

Once the ?what? and ?who? segments
are well defined and developed,
the companies need to ascertain that
the ?how? is equally well executed,
that is, effective communication channels
have been deployed. There are
attributes that are similar or dissimilar
between investors and analysts, therefore,
a robust communication strategy
should act on these similarities and
variances, applying several channels
to target specific clusters of stakeholders.
A critical thing about extra financial
information is the extra rigour on
quality disclosure not just quantity.
Stakeholders need information that
supports comparison and benchmarking
around these parameters that
have always posed a major challenge
to conventional investment analysis.

Investors and many other stakeholders are already contributing to
the global movement in improving
the comparability of extra-financial
information by joining industry-wide
efforts. It is clear that companies
would also benefit from participating
in these large-scale efforts to enhance
the comparability of extra-financial
information ? through development of
standardised benchmarks and methodologies.
In order to advance to the
next stage of adoption, collaboration
across multiple disciplines, sectors
and standard setting organisations
will be required to take it to the desired
conclusion. One such effort that is
gaining ground is Business Responsibility
Reports (BRRs) by listed companies
based on the National Voluntary
Guidelines (NVGs) as recommended
by the Ministry of Corporate Affairs
(MCA). MCA, in July 2011, came out
with the revised ?National Voluntary
Guidelines on Social, Environmental
and Economic Responsibilities of
Business.? Comprising of nine Guidelines
and 48 core elements, the NVGs
provide a framework for responsible
business action, which can be used by
most of the segments of businesses.
The drafting committee adopted an
extensive consultative approach while
developing the guidelines. Substantial
inputs of various stakeholders ? leading industry associations, experienced
professionals, and other experts ? are
duly reflected in the final version. It
also provides a section on reporting,
to enable businesses to demonstrate
adoption of these guidelines to stakeholders
through reliable disclosures.

There are
attributes that are
similar or dissimilar
between investors
and analysts,
therefore, a robust
communication
strategy should act
on these similarities
and variances,
applying several
channels to target
specific clusters of
stakeholders.

Taking this disclosure initiative to
another level, Securities & Exchange
Board of India (SEBI) in a landmark
decision in August 2012, mandated the
inclusion of BRRs as part of the companies?
annual reports. Initially, the
requirement to include the reports on
a ?comply or explain? basis was made
mandatory for the top 100 listed entities
based on market capitalisation as
on March 31, 2012. SEBI also indicated
that more companies will be added
into the scope in due course but also
encouraged other listed entities to voluntarily
disclose BR Reports. As some
of the initial confusion settles down
and the check-list mindset evolves into
more spirited implementation, these
reports may prove to be an influential
source of extra-financial information.
There may be further refinements that
will come along but developing communication
around such integrated
reporting could bring significant
benefits to reporting companies and
stakeholders alike ? especially in
mainstreaming material extra-financial
risks and opportunities.

To sum up, all the stakeholders
are increasingly considering the
corporate performance on financial
and extra financial parameters for
a well-rounded picture. Successful
companies have already made the
transition from the outdated financial
modeling to more sophisticated and
more sustainable partnership modeling
that goes beyond a focus only on
shareholder wealth. In the long term,
the key differentiator between the
companies that succeed and those that
do not in this extra financial end game
will be this complete engagement on
such issues with all the stakeholders
and, very importantly, the strategic
communication of such objectives and
milestones to the capital
markets.